Possible topics for trust fund menu include management of natural resource wealth, because volatile revenues can pose problems (photo: Newscom)
CAPACITY BUILDING
The menu-based Topical Trust Funds approach is designed to augment IMF resources already allocated to technical assistance.
Demand for the IMF's technical assistance is rising continuously, particularly that of low- and lower-middle-income countries seeking to build the institutions and capacity needed to implement growth-enhancing policies. To meet this rising demand as well as better coordinate assistance delivery, the Fund seeks to strengthen its partnerships with donors by engaging them on a broader, longer-term, and more strategic basis.
Various entry points
The idea is to pool donor resources in multidonor trust funds that would supplement the Fund's own assistance resources while leveraging the IMF's expertise and experience. The funding model is planned to operate by region and by topic, offering donors various entry points according to their priorities. Complementing the IMF's regional technical assistance centers, topical trust funds will provide global geographical coverage and specialized topical scope.
Supported by a research agenda, these trust funds are intended to be at the vanguard of international best practice in delivering assistance, addressing more advanced or complex issues within their field of specialization. The trust funds would create synergies with the work of the IMF's regional centers, which focus on hands-on implementation of such advice on site.
Comparative advantages
The proposed trust funds have several advantages over more traditional forms of assistance delivery. For recipient countries, they increase the project scope and resources available for capacity building. They promote coordination between donors and assistance providers—as called for in the 2005 Paris Declaration on Aid Effectiveness—and thus avoid costly duplication.
Trust funds also provide donors a menu of topics to support, depending on their development strategies and priorities, while using the Fund's technical expertise and existing apparatus for assistance delivery and followup. For the IMF, trust funds enable collective action in areas of common interest, and leverage the Fund's own resources in strategic priority areas..
Key to the success of the trust funds is their governance structure—built on the successful model of existing IMF multidonor subaccounts—and integration in other IMF activities. The following is being considered:
• Each trust fund would be guided by a steering committee, composed of donor representatives and IMF staff. Where needed, international and regional institutions and assistance providers in the relevant field could be invited to participate as observers. The steering committee would provide strategic guidance and contribute to the setting of policies and priorities, including review and endorsement of an annual work plan. It also would be a forum for donors to coordinate assistance and exchange information.
• Complementing this top-down approach will be a bottom-up process to identify and prioritize assistance needs. In preparing Regional Strategy Notes, IMF area departments consult with country authorities to integrate their reform agendas with the Fund's own policy and surveillance priorities. This prioritization process provides checks and balances that ensure IMF assistance remains relevant and focused on its core expertise, while observing regional developments. The resulting integration into the Fund's surveillance and lending operations is intended to boost the traction of IMF assistance.
Trust fund topics
IMF staff have started talks with donors on a range of topical trust funds. Work is most advanced in the preparation of a trust fund covering anti-money laundering and combating the financing of terrorism. The trust fund is expected to become operational in May 2009, and a full trust fund menu of topics is planned over the next few years. Possible topics include
• Money laundering activities, which can cause serious macroeconomic distortions. IMF assistance would support developing a robust Anti-Money Laundering and Combating the Financing of Terrorism regime needed for fully integrating a country into the global financial system.
• Fragile states, which are often unable to mobilize sufficient international support at the critical early stages of their reform efforts. IMF assistance and economic advice can help countries absorb parallel assistance from other donors and assistance providers.
• Data provision, which is weak in many low-income countries and hampers sound macroeconomic and financial analyses needed for policy decisions. Assistance with General Data Dissemination Standards and National Strategy for the Development of Statistics under the trust fund would assist countries in improving the quality of key economic, financial, and sociodemographic statistics and in moving toward macroeconomic data transparency.
• Public financial management, which is an essential underpinning of good governance and effective and efficient use of domestic and aid resources. IMF assistance would support countries in developing and implementing sound fiscal and budgetary policies and managing and monitoring public expenditure. Progress in these areas would also lower fiduciary risks associated with direct budget support.
• Management of natural resource wealth. Large and volatile revenues from natural resource extraction present significant challenges to resource-rich countries with development needs. By focusing on fiscal regimes, macroeconomic issues, and asset/liability management and sovereign wealth management, IMF assistance would help with prudent financial and sovereign balance sheet management, thus also reinforcing the Extractive Industries Transparency Initiative.
• Debt sustainability and public debt and asset management. With international debt relief initiatives restoring debt sustainability in many low-income countries, suitable debt strategy and risk analysis are needed to prevent a return to an unsustainable debt path. Donors, assistance providers, and country authorities have called for a coordinated approach to capacity building in debt management. IMF assistance, which also helps countries link debt management to public financial management reforms, is expected to play a central role in this effort.
• Financial sector stability and development. Weaknesses in financial systems and policies can have a devastating impact on macroeconomic stability. Targeted to low-income countries, IMF assistance would help strengthen supervisory, legal, and monetary frameworks and market infrastructure, and analyze macro-financial linkages.
Comments on this article should be sent to imfsurvey@imf.org
